Stage One (Denial)

“I feel fine.” “This can’t be happening, not to me.”

There is no doubt the retail sector has spent many years in this first stage.  It has been in denial about online shopping for a long time.  Amongst the many beliefs that underpin this view is the rather short-sighted assessment that internet shopping was a fad and/or that good old customer service would see consumers return to their favorite physical stores in due course.

Thankfully we appeared to have emerged from this stage by late 2010.

Stage Two (Anger)

“Why me? It’s not fair!” “How can this happen to me?”  ”Who is to blame?”

2011 started with Gerry Harvey suggesting; “for many retailers this is a case of life or death” (in reference to online competition). These comments kicked off fierce lobbying from the retail sector, where it claimed the government was to blame for not protecting Australian retailers and for not taking strong enough action in the past to prevent the situation.

These ‘discussions’ centered mostly on the GST exemption for international retailers on goods sold under $1000.  Despite research showing that online products were often 20-40% cheaper than retail prices, the sector claimed a change to this tax would allow them to compete (on price) with online retail.  Clearly, somebody needs to do their maths!

Myer’s chief executive Bernie Brooks went as far to publically claim that ‘up to 30,000 jobs could be cut from the Australian retail sector unless GST and import duty exemptions are removed from online purchases of less than $1000 made via foreign websites. It does raise the question, what supposed information is Bernie making this claim on the back of and why did not just the unions deny this figure but so did all credible economic journalists in the country.

Stage Three (Bargaining)

“I’ll do anything for a few more years.” “I will give my life savings if…”

January 2011 was not a good time for the retail sector.  It was left with little sympathy from either the government or even the buying public. By mid January, in what appeared to be quite a backflip on behalf of a coalition of retailers, (which included David Jones, Myer, Target, House, Borders and Angus & Robertson) Gerry Harvey admitted that the campaign against online retail was “bad timing” and the “message had been poorly communicated”.

Having recognized this, and no doubt prompted by the negative perception created by a billionaire spokesman arguing for changes to allow his and other companies become more competitive, Gerry Harvey told the press that his involvement in the issue was “suicidal”.

From there, quieter, less public and less emotional negotiations began between retailers and government. In February of 2011 the Online Retail Forum meet for the first time, supported by its tag line: An industry dialogue to discuss the benefits, challenges and solutions for online retail in Australia.

Stage Four (Depression)

“I’m so sad, why bother with anything?”  ”I’m going to die soon so what’s the point… What’s the point?”

By July 2011 the tax debate had fallen off then agenda and it had generally been accepted that the government had no intention of changing the GST exemption on international goods under $1000.  In recognition of the lost battle, Mark McInnes expressed a feeling a hopeless for the Australian Retail Sector:

“…it’s a small cost to offer free shipping into Australia compared with employing people, spending capital opening stores or paying rent. I’d much rather be in that business. And by the way, we can’t do that to other countries. We can’t export from this country into the UK and the US and have that type of tax free regime because it just doesn’t exist in any other Western country. It’s an arbitrage. It’s a classic arbitrage.”

Stage Five (Acceptance)

“It’s going to be okay.”  ”I can’t fight it, I may as well prepare for it.”

By the time August 2011 rolled around, the major complainants had turned into advocates.  Harvey Norman had officially announced that within a month it would be offering around 80% of its product range via its website.  Not to be left out, Myer had launched its online offering through www.myfind.com however, that initiative doesn’t look to be any more successful than David Jones’ first attempt online – which reportedly lost around $28 million dollars before being switched off in 2003.

5 Stages Down. What Now?

Interestingly, the lead-time to go online (particularly given the size and nature of these established brands) means many of the very companies fighting for greater protection of bricks and mortar retailers earlier in the year, must have already been working behind the scenes to go online.

So was it all a charade to distract the competition?  I doubt it: each major player would have been well aware of the others’ plans. Instead, I believe their public actions and complaints actually stemmed from the realisation they didn’t know how to win in this space, before they even launched.  So while their development teams were gearing up to go live, the management teams were preparing to justify to shareholders why it wouldn’t (or didn’t) work.  Maybe it’s a cynical view, but it certainly matches the evidence.

The two key lessons here for business is (1) Online Retail is not going away and (2) The Australian government and public won’t support protective measures for the offline retail sector and the disproportionately higher prices for consumers

My prediction is that in 2012, Australian retail sector (and indeed business more broadly) will finally stop debating how to protect offline retailers or whether retailers who haven’t already gone online should do so.  Instead, 2012 will be about building on the acceptance that the internet is now a major part of the retail landscape and begin developing strategies to ensure the digital space is part of their business model.

DC Strategy is your business growth specialist. For more information on taking your business online contact DC Strategy:

Tim McDougall
Online Strategy Manager
tim.mcdougall@dcstrategy.com
03 8615 7205

This story was originally published on www.dcstrategy.com.au

Thinking of selling or merging your business with another? Here are some key considerations for mergers and acquisitions.

No one was surprised in 2006 when Disney, the undisputed leaders in animated films, acquired newcomer Pixar for a staggering $7.4billion.

The strategy was obvious to even the least interested observer. The creation of a single company would help the businesses cement and protect their position in the animated film industry.

Mergers and acquisitions are excellent strategies to generate growth. In many cases, the goal is often to create a sustainable competitive advantage or protect market share. However, pursuing
a merger or acquisition does have its risks, especially if the deal is overpriced and heavily debt funded. Despite these risks, it is clear that merger and acquisition activity is increasing, especially in challenging sectors such as retail.

There’s no doubt that many retailers in Australia are experiencing some challenging conditions. The value of the Australian dollar and relative ease with which consumers can buy over the internet coupled with reduced consumer spending have made business difficult. Consequently, many businesses are facing increased financial pressure and the immediate need to manage costs and increase efficiencies. One of the ways in which business can do this is to merge with a similar business and share back office platforms and systems. The value of doing so can be easily seen in Dymocks’ acquisition of Healthy Habits a couple of years ago. At first glance bookstores and sandwich bars have little in common, but on closer evaluation, the opportunity to share common back office systems was an obvious incentive.

Exploiting economies of scale can help companies reduce their fixed cost base and increase profit margins. It may also enable greater efficiencies in meeting consumer demands, marketing and distribution costs or the introduction and cross utilisation of products. The Fosters Group is a good example. In the early 1990s, Fosters’ strategy was to diversify its product offering into wine. It quickly acquired Mildara Blass, Rothbury and Beringer Wine Estates in a few short years. Its intent was to become a global premium-branded beverage company. Obviously, some mergers are more successful than others. In an apparent reversal of
its long-held strategy, Fosters has been de-merging its wine operations after years of underperformance. Just last year, Fosters sold off non-essential wine brands and in May 2011 spun off its wine division into a separately listed company.

Partner Selection

Undoubtedly, one of the most critical issues facing businesses considering a merger is to find the right partner. Whether the merger involves small or large businesses, the partners’ objectives, ethos, way of doing business and expectations need to be aligned. Prospective partners need to agree on all aspects of the proposed merger and conduct an early assessment of the regulatory and legal hurdles. The latter is especially important to avoid unnecessary costs and time.

Each party involved in a merger or acquisition need to undertake proper due diligence. This involves a thorough assessment of the others business; its structure, financial results, management, systems, contracts and debts just to name a few. As a general rule, the more due diligence, the greater the probability the merger or acquisition won’t be derailed for some unforeseen reason.

Quite often, it is beneficial for businesses seeking to merge or acquire to seek assistance from brokers or agencies. These third parties can often find the most appropriate partner through their broad networks and general knowledge of the business community and their clients’ needs.

Legal structure

There are a number of ways in which an acquisition can take place:

1. Acquisition of shares. Here, the purchaser acquires shares in 
the target company. One of the risks in this approach is that the purchaser “inherits” the target company’s past – including all of its liabilities. The purchaser cannot decide on which assets it wishes to purchase or which liabilities it wishes to assume.
2. Acquisition of the business or of business assets. Here, the purchaser selects the assets it wishes to acquire. As such, it will not be burdened with having to accept the target company’s liabilities. However, the purchaser needs to ensure that the assets it acquires are not encumbered by a mortgage or some other security interest.

One of the most important issues in this type of acquisition is to ensure the title in the relevant assets is properly transferred. This includes intellectual property assets such as trademarks and any other materials related to the brand.

Although merger and acquisition activity has increased over
the last few years, valuing a specific opportunity has become more challenging in that time due to the uncertain economic and financial circumstances. Consequently, it is critically important purchasers clearly understand the form of payment and financing options available. Prudent purchasers will seek appropriate professional advice when valuing the target company’s assets and business.

Earn Outs

In today’s markets, purchasers are generally more cautious about acquiring businesses. One of the most obvious points of concern is the degree of gearing the purchasers are generally willing to accept.

Earn-outs provide a method of mitigating some degree of
risk. Here, the seller’s ability to receive payments as a result of the transaction is directly linked to the businesses performance. If the business reaches or exceeds certain targets then the seller’s payments are paid in accordance with the sales agreement. If the business fails to achieve the target performance level, then some reduction (also contained in the sales agreement) in the amount to be paid is made.

In the ear­n-out scenario, each party has some degree of risk. For example, the purchaser may not be able to get the seller to agree to the earn-out conditions. The seller has to ensure the purchaser does not deliberately fail to meet the target performance. More often than not, the seller remains in close contact with the business, often in an advisory or executive role.

Earn-outs can reduce a purchaser’s initial payment
and to a certain extent at least, provide some security that
the business will continue to perform. In effect, the purchaser minimises the risk of over-paying for future revenues and profits.

For the seller, agreeing to an earn-out may result in a higher effect sales price than an outright and immediate sale. However, sellers should generally be cautious about performance- based earn-outs. It is a case of balancing the upfront payments with the risk associated with the ongoing performance of
the business.Ideally, the seller should obtain a substantial up-front payment and have limited exposure to the ongoing performance of the business. The rationale is that if a substantial portion of the purchase price was linked to post-settlement performance, the purchaser has a heightened interest in manipulating the businesses’ performance to minimise the payments to the seller.

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Earn-outs pose risks for both the purchaser and the seller. Parties which enter into such arrangements should ensure
that appropriate conditions are included in the sales agreement so that the performance potential of the business is protected.

Every business owner should have a clear exit strategy to extract the maximum value from the business upon exit. Whether or not the maximisation of value comes from merging or acquiring another business, exit strategies should be well planned in advance. This will help avoid the potential for poor decision making when under pressure.

It is critical that shareholders have an agreed and well documented exit strategy. Shareholders often have very different and conflicting views which often only come to light as an offer to merge or be acquired is laid on the table. It Every business must have a well drafted shareholders agreement covering the principles to be applied if the business is engaged in a merger or acquisition.

As with most business issues, obtaining high quality professional advice early can help the business and its owners avoid conflict and confusion when critical opportunities become apparent.

DCS Lawyers are your business growth specialists. For more information in relation to Mergers and Acquisitions, please contact us.

Little comment in commercial circles has occurred in relation to the Personal Property Securities Act 2009. Some companies know in a general sense that this Act is about to come into force, but few understand the practical implications of the legislation.

This may be due in part to the government’s poor explanation and the complex nature of this area of the law. It may also be due to the fact that the mainstream media has not picked up on the story.

However, the commercial implications of the Act are profound and franchisors and suppliers in particular should be aware of the dramatic ways in which the legislation could affect their businesses.

Fortunately implementation has now been delayed (yet again) from the anticipated start date of October 2011 until early 2012 due to teething problems identified in administering the beta version of the national register. This allows key participants to come to terms with the new regime and prepare their systems to deal with the additional administrative demands that this new legislation will impose upon them.

Background

The Personal Property Securities Act 2009 (PPSA) is a Commonwealth Act designed to set up national system of registration for claims against property other than land. It seeks to clarify the position of competing creditors in relation to all security interests in “personal property”.

As is well known, banks and other creditors already have clear rights in relation to land through registered mortgages and Torrens title. They also have clear rights in relation to their claims against companies through the ASIC registration of fixed and floating charges.

This new regime is designed to achieve something similar in relation to security interests attaching to “personal property rights”.

Why is this necessary?

It is often difficult to know whether somebody in possession of goods actually owns those goods unencumbered. For example, a store selling second hand products may have purchased those goods outright or be holding them on consignment for the seller, and the seller actually still owns the goods despite the “appearance” of the store owning and presenting the goods for sale.

If that store goes into liquidation, often creditors are confused as to what particular items are owned by the store (and therefore can be taken by creditors and sold in satisfaction of the debt) and what items are owned by third parties (and therefore cannot be taken by creditors but must be returned to their owners).

The key reason for the PPRA is to introduce one national register of encumbrances over personal property – the PPS Register – that can be searched to easily and quickly identify the state of encumbrances in respect of a business or person.

This will allow banks and other creditors to lend to businesses and individuals, confident in their knowledge of the borrower’s true financial status.

However, other suppliers to these business who did not have to “compete” with banks and other financial institutions on liquidation (due to retention of title clauses in supply agreements and other commercial arrangements) will now be forced to register their interests to ensure they are not “blocked” from retaining their interest due to lack of registration.

What is “personal property”?

Essentially, personal property involves all property rights other than land and buildings and other rights specifically excluded from the PPSA.

What is a “security interest”?

Security interests are transactions that grant an interest in personal property to secure payment or performance of an obligation.

Examples of security interests in personal property include the following:

• The right of a supplier to recover goods for non-payment (so called retention of title rights under a supply agreement)
• Consignments (where goods are placed for sale but title is retained by the seller until the sale occurs)
• Partial or total assignments of intellectual property which provide for a reversion (or transfer) back to the owner after an agreed period (for example, at the end of a licence agreement)

The PPSA creates a Personal Property Securities Register (PPS Register) on which personal property security interests need to be noted. Failure to note a personal property security interest could lead to a loss of entitlements or priority in a situation of insolvency.

How does this affect me?

Suppliers Beware

For suppliers, they should review their retention of title clauses with their lawyers and consider a streamlined process to register their interest with the PPS Register. Given the administrative complexity in registering individual invoices (which is a near impossibility for most businesses) a standing supply agreement could be signed between the parties and that agreement could be registered to allow for a simplification of the process of registration.

There is a real danger that retention of title clauses will be rendered ineffective with this legislation given that many suppliers will not bother to register their interests. You should seek appropriate advice now to ensure your supply arrangements are not adversely affected by these changes.

Importers and suppliers to retailers in particular should comprehensively review their current arrangements. If they do not have standing supply agreements and rely on the terms of their individual invoices, they should seriously consider entering into standing supply agreements now in preparation for registration with the PPS Register next year to protect the effectiveness of their retention of title clauses.

Franchisors Beware

Franchisors should review their franchise agreement in light of the new legislation and at the very least their agreement template should provide for the power to: (1) register their security interests against the franchisee and (2) prohibit the franchisee from giving security interests to third parties without the franchisor’s consent.

In addition, franchisors should consider the consequences of taking back possession of property on termination and consider amending the handback provisions to take into account the “notice” requirements under the PPSA.

Unfortunately, given the complexity of the legislation, most franchisors will need to make contact with their legal advisors to ensure their template franchise agreement is amended appropriately.

Conclusion

This legislation will prove a benefit to lawyers (and creditors) but a burden to commercial suppliers and others who are faced with a new regulatory regime which diminishes the effectiveness of retention of title clauses and puts another layer of complexity into “normal” commercial dealings. However this legislation (having been “imported” from the UK and New Zealand) will soon become a fact of life in commercial dealings – particularly in retail and franchising – and franchisors are encouraged to obtain appropriate advice to protect themselves and their franchise systems in future.

DCS Lawyers is your business growth specialist. For more information in relation to The Personal Property Securities Act, please contact:

Image courtesy of Ambersky235